World in 2018

DIEGO ALONSO CANTÚ AGUILAR

alonsoaguilardc@gmail.com

Problem Context1.-Its 2018, 10 years after the Great Financial Crisis and a 10 year long bull market.

2.-End of Quantitative Easing -> Beginning ofQuantitative Tapering = Liquidity Reduction. [32].

3.-Rising Debt to GDP Ratios. Debt > Growth

4.-Rising Interest Rates. Yield Curve Inverting.

5.- Rising Trade Tensions.

6.-42 Trillion USD of pension fund assets at risk.Most pension plans are underfunded because theactuarial rate expected is 7 to 8%, while the saferate of return has been much lower decades.

7.-Baby Boomers are retiring.

8.-Central Banks are buying Gold.

9.-Energy and Commodities falling.

10.-Real Estate Stalling.

Quantitative Tapering ➢Unwinds Treasuries and Mortgage-BackedSecurities.

Commodities Falling / Real Estate Stalling

Doctor Copper

Macrotrends.

Initial Jobless Claims Historical Chart

Macrotrends.

Capacity Utilization Rate - 50 Year Historical Chart

Macrotrends.

10 Year Treasury Rate - 54 Year Historical Chart

Macrotrends.

30 Year Fixed Mortgage Rate - Historical Chart

Macrotrends.

Historic Anomaly: Negative Interest Rates!

Rising Interest Rates = Faster Debt Growth

How big is the Dollar Debt? 50 T

Good News: Defaults are still lowHowever, its important to mention that banks are leveraged. Bear Sterns was leveraged 35.6 to 1when it failed. Lehman Brothers was leveraged 30.7 to 1 when it failed. Merrill Lynch was at 26.9 to 1.

Bad News: Layoffs in 2018➢Toys R Us: 33,000

➢Ford Motors: 25,000

➢General Motors: 15,000

➢BT: 13000

➢Deutsche Telekom: 10,000

➢Ericsson: 10,000

➢Walmart: 10,000

➢Siemens: 7000

➢Aircel: 5000. Bankrupt.

➢Kimberly Clark: 5500

➢HP: 5000

➢JC Penny 5000

➢Macy’s 5000

➢AT&T: 4600

➢Lava: 4000

➢Ricoh: 4000

➢Tesla: 3600

➢Verizon: 3000

➢HUAWEI: 2400

➢HTC: 1500

➢Telstra: 1200

➢Broadcom: 1100

➢Qualcomm: 1000

➢Pepsi: 1000

Baltic Dry Index

Baltic Dry Index vs. Oil PricesCrude Oil Prices 1988-2018

Macrotrends.

South Korea and China Exports

Debt Growth + Rising Interest Rates•IMF [30], in 2017 World GDP was 80.5 Trillion USDand is expected to reach 84.84 in 2018.

•Global Debt in 2017 reached 237 T USD according theIIF [31]. At Q1 of 2018, it reached 247 T USD.

•10 Year US Treasury rose from 1.5% in June 2016 to3.15% in October 2018. If the existing debt is 247 Tand it paid only the risk free rate > 3% the annualinterest cost would be: 247*.03 = 7.41 T. ForecastedGDP Growth for 2018 was 84.84 T – 80.05 T = 4.79 T.

•The cost to service the debt is 1.55 > than growth. Itcould rise to 1.67, 1.8 and 1.93 with coming ratehikes (.25 % per hike).

•What happens when the cost of servicing debt isgreater than the income? Default.

Gasoline Futures - Price & Chart

Macrotrends.

Crude Oil Prices - 70 Year Historical Chart

Macrotrends.

American Chemistry Council (ACC)

US Debt to GDP Ratio

Macrotrends.

Global Debt vs. Global GDP Our Debt to GDP ratio is greater thanthe ratio on 2007. In 2007 the 10Year US Treasury interest rate was4%. In 2018 we have surpassed 3%.We are experiencing DisminishingReturns: Growth costs more Debt.

2007-14: 1 growth costed 1.54 debt

2014-15: -1 growth costed 2.36 debt.

2015-16: 1 growth costed 4.76 debt

2016-17: 1 growth costed 5.75 debt.

2017-18: 1 growth costed 5.23 debt

2018-Q1: 1 growth costed 6.68 debt.

33.84

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Global Debt vs. Global GDP

Global GDP Global Debt Debt to GDP Ratio

Can Central Banks estimulate again? • Central Banks estimulated the economy in the aftermath of the Great Financial Crisis byincreasing their Balance Sheets 15 Trillion USD. This was denominated Quantitative Easing.

Quantitative Easing worked•Quantitative Easing succeeded inrecovering the prices of stocks, bondsand real estate.

•This chart of Bianco Research comparesthe SP500 index against the applicationof Quantitative Easing.

SP500 vs. Federal Reserve Balance Sheet

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SP500 vs. Federal Reserve Assets .90 Correlation

WALCL SP500

Reaction to QE and low interest ratesAccording to the data; even though interest rates were at record lows; savers decided toincrease their Personal Saving Rate from 2.2% in 2005 (2 years before the crisis) to a peak of 12%in December of 2012 (beginning of QE 3). In March 2013 it fell to 5.9% and remained on a 6% to8% rate since the end of QE. Why? A plausible explanation is that the reduced income fromsavings forced savers to increase their savings, particularly those planning to retire.

Money Velocity is at Historic Lows…. It stopped falling in 2017 and started rising in 2018. QE is risky now.

What could possibly go wrong?

Global Central Bank Balace Sheet: 25 TrillionKey Central Banks

➢Federal Reserve

➢European Central Bank

➢People’s Bank of China

➢Bank of Japan

Together these 4 Banks account for > 20 T USD.

80% of the Total

Savings don’t pay. But houses do.

You have a expensive house, you can’t work anymoreand you have no retirement savings…what do you do?Since only 1/3 of the BabyBoomers has enough for retirement and 1/3 has no savings…would it be possible that many of them decide to sell their overpriced houses and retire to a low cost area?

How big are pensions now?

Underfunded pensions…a +400 T Problem

Who is expected to pay?

US individual retirement savings shortfall

Delayed Retirement

Yield Curve 10 vs. 2 Year.

Corporate Yield Curve

Inverting Yield Curve (Taps Coogan)

Exeter’s Pyramid

Derivatives

Real State + Business

Stocks + CorporateBonds

Government Bonds

Bank Money

Base Money

Gold & Silver

1.-Derivatives > 1 Quadrillion USD

2.-Real Estate > 180 Trillion + Business > 100 Trillion USD

3.-Stocks and Corporate Bonds > 116 Trillion USD

4.-Government Bonds > 56.7 Trillion USD

5.-Bank Money > 50 Trillion USD

6.-Base Money > 28.8 Trillion USD

7.-Gold & Silver < 3 Trillion USD

Data collected by Demonocracy.info in 2017 [29].

Higher Risk

Lower Risk

Deleveraging Dynamic: Emerging Countries Currencies Pulverized

Deleveraging Dynamic: Real Estate FallsS&P Homebuilders Select Industry Index

Deleveraging DynamicSubprime borrowers (High Yield) are affected first.

Deleveraging DynamicAfter High Yield Bonds, Investment Grade Bonds are also affected.

USD Dollars and Treasuries wereconsidered safe havens in 2008

U.S. Dollar Index - 20 Year Historical Chart 10 Year Treasury Rate - 20 Year Historical Chart

Macrotrends. Macrotrends.

Quantitative Easing vs. Gold

Gold to Silver Ratio - 100 Year Historical Chart

Macrotrends.

Gold & Silver Prices Now at Inflation-Adjusted 50-Year Lows

Gold & Silver Prices Now at Inflation-Adjusted 50-Year Lows

History doesn’t repeat…but it rhymes.

Price of Gold in VEF in Dic 31 2009: 2,440

Price of Gold in VEF in Dic 7 2018:

310,357,033.44

What if Venezuela is only the start?

Venezuela Bolivar Fuerte vs. Gold

Central Banks Options➢1929 style Deflation if no Quantative Easing is used.

➢Global Hyperinflation as currencies fail one after theother.

➢Is there another way? What could be done tominimize the damage and keep the critical systemsworking?

Critical Systems we can’t lose➢The Financial System Credit that enables ModernLogistics. Cities have 3 days of food supplies.

➢The Energy System that produces the oil and gasolineneeded to keep the trucks running.

If either System fails, Modern Logistics will fail and weare looking at up to 90% casualties. It might be a fall wewill not be able to recover in decades…or more.

➢What can be done to keep the lights on?

Thank you. Any recommendations?

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[2] M Awad and R. Khanna. Efficient Learning Machines. Apress, 2015.

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[11] Tyler Durden. Deutsche: ”Every Fed Tightening Cycle Creates A Crisis”. Zero Hedege, 2018.

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[15] Ian Goodfellow, Yoshua Bengio, and Aaron Courville. Deep Learning. MIT Press, 2016. http://www.deeplearningbook.org.

[16] Thinking Ahead Institute. Global pension assets study 2018. Willis Tower Watson, 2018.

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[20] Harry Markowitz. Portfolio selection. The Journal of Finance, 7(1):151, 1952.

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[22] Andrew Ng. Machine Learning. Standford University, 2018.

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[28] American Trucking Association. When Trucks Stop, America Stops. 2015. https://www.trucking.org/ATA%20Docs/What%20We%20Do/Image%20and%20Outreach%20Programs/When%20Trucks%20Stop%20America%20Stops.pdf

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[30]

References[31] Statista. Global gross domestic product (GDP) at current prices from 2012 to 2022 (in billion U.S. dollars).2018.

https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/

[32] Wolf Richter. The Fed Accelerates its QE Unwind. Wolf Street. 2018. https://wolfstreet.com/2018/08/03/fed-

accelerates-qe-unwind-balance-sheet-normalization/

[33] IMF. World Economic Outlook, October 2018. 2018.International Monetary Fund.

https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018

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around.html?utm_source=scroll&utm_medium=referral&utm_campaign=scroll

A1.-Inverted Yield Curve November 2000

A1.-Inverted Yield Curve 2006

A1.-Yield Curve in 2018 close to invert

A2. Inverting Yield Curve

A2.Inverting Yield Curve

A2.Inverting Yield Curve

B1.Stock Buybacks

C1.Disminishing Returns•78.83 T World GDP vs. 199 T in Q2 2014. Debt to GDP Ratio: 2.52

-3.18 T / +15 T of Debt = -1 dollar of Growth costed 5 dollars of debt.

•75.65 T World GDP vs. 214 T World Debt in 2016. Debt to GDP Ratio: 2.82

4.4 T / +23 T of Debt = 1 dollar of Growth costed 5.75 dollars of debt.

•80.05 T World GDP vs. 237 T World Debt in 2017. Debt to GDP Ratio: 2.96

4.79 T / 4 = 1.1975 T of GDP in Q1. IFF 8 T of Debt Growth in Q1 2018 vs. 1.1975 T estimated growth in Q 2018 = 1 dollar of Growth costed 6.68 dollars of debt in Q1 2018.

•84.84 T World GDP vs. 247 T World Debt in Q1 2018 and Q2 2018. Debt to GDP Ratio: (247/81.2475) = 3.04.

D1. Oil vs SP500

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Oil vs Sp500 Corrrelation of .81 (2008-2015) and (2015-2018)

SP500 DCOILWTICO